May 2014 Retail Banking and Wealth Management Investor Update May 2014 John Flint Chief Executive, RBWM
Forward-looking statements This presentation and subsequent discussion may contain certain forward-looking statements with respect to the financial condition, results of operations, capital position and business of the Group. These forward-looking statements represent the Group s expectations or beliefs concerning future events and involve known and unknown risks and uncertainty that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Additional detailed information concerning important factors that could cause actual results to differ materially is available in 1Q 2014 Interim Management Statement. Past performance cannot be relied on as a guide to future performance. 2
I. Group and RBWM Results 1Q14 results Group Financial highlights 1 Summary financial highlights, USDbn Better/(worse) 1Q13 4Q13 1Q14 1Q14 vs 1Q13 1Q14 vs 4Q13 Reported PBT 8.4 4.0 6.8 (1.6) 2.8 Underlying 2 PBT 7.6 3.5 6.6 (1.0) 3.1 Key ratios % 1Q13 4Q13 1Q14 KPI Return on average ordinary shareholders equity 3 14.9 5.9 11.7 12-15% Cost efficiency ratio 50.8 69.6 55.7 mid-50s 4 Jaws (underlying) (6.4) Positive Advances-to-deposits ratio 5 72.9 72.9 73.9 < 90 Common equity tier 1 ratio (transitional basis) 10.8 10.7 >10% Common equity tier 1 ratio (end point basis) 10.1 10.9 10.8 >10% 1. All figures are reported unless otherwise stated and are sourced from HSBC's 1Q 2014 Interim Management Statement ("1Q14 IMS") and accompanying data pack ("1Q14 data pack"). 2. Adjusted for foreign currency translation differences, acquisitions, disposals and changes in ownership level of subsidiaries, associates, joint ventures and businesses, and fair value ( FV ) movements in credit spread on own long-term debt issued by Group and designated at fair value 3. On an annualised basis 4. Calculated as percentage growth in net operating income before loan impairment charges and other credit risk provisions less percentage growth in total operating expenses, 1Q14 versus 1Q13 5. Excludes reverse repos and repos 3
I. Group and RBWM Results Group Financial overview Reconciliation of Reported to Underlying results USDm Variance 1Q14 1Q13 4Q13 1Q14 vs 1Q13 vs 4Q13 Reported profit before tax 8,434 3,964 6,785 (1,649) 2,821 Includes: FVOD 1 (243) (652) 148 391 800 Gain on de-recognition of Industrial Bank as an associate 1,089 - - (1,089) - Gain on sale of associate shareholding in Bao Viet Holdings 104 - - (104) - Loss on sale of Household Insurance Group s insurance manufacturing business (99) - - 99 - Gain on disposal of Colombia operations - - 18 18 18 Gain on disposal of Panama operations - 1,107 - - (1,107) Other gains / losses on acquisitions / disposals - (77) - - 77 Operating results of disposals, acquisitions and dilutions (73) 51 (2) 71 (53) Currency translation 67 35 - (67) (35) Underlying profit before tax 7,589 3,500 6,621 (968) 3,121 Significant items included in underlying profit before tax (reported basis) Revenue 935 (276) (141) (1,076) 165 Operating expenses (458) (1,424) (123) 335 1,301 All figures are sourced from 1Q14 IMS & 1Q14 data pack 1. Fair value movements on our long-term debt designated at fair value resulting from changes in credit spread 4
I. Group and RBWM Results Group Financial overview Significant items included in underlying profit before tax USDm All figures are sourced from 1Q14 IMS & 1Q14 data pack 1. In the first quarter of 2013 the private banking operations of HSBC Private Bank Holdings (Suisse) SA in Monaco were classified as held for sale. At this time, a loss on reclassification to held for sale was recognised following a write down in the value of goodwill allocated to the operation. Following a strategic review we decided to retain the operation, and the assets and liabilities of the business were reclassified to the relevant balance sheet categories, however the loss on reclassification was not reversed. Variance 1Q14 1Q13 4Q13 1Q14 vs 1Q13 vs 4Q13 Underlying profit before tax 7,589 3,500 6,621 (968) 3,121 Includes the following significant items (reported basis): Revenue Restructuring and repositioning: Net gain on completion of Ping An disposal 553 - - (553) - FX gains relating to the sterling debt issued by HSBC Holdings 442 - - (442) - Write-off of allocated goodwill relating to GPB Monaco business 1 (279) - - 279 - Loss on early termination of cash flow hedges in the US run-off portfolio (199) - - 199 - Loss on sale of an HFC Bank UK secured loan portfolio (138) (8) - 138 8 Loss on sale of several tranches of real estate secured accounts in the US - (123) (30) (30) 93 Volatility: Debit valuation adjustment on derivative contracts 472 (195) 31 (441) 226 Fair value movements on non-qualifying hedges 84 50 (142) (226) (192) 935 (276) (141) (1,076) 135 Operating expenses Restructuring and repositioning: Restructuring and other related costs (75) (87) (40) 35 47 Customer redress and litigation-related charges: UK customer redress programmes (164) (395) (83) 81 312 Regulatory investigation provisions in GPB (119) (35) - 119 35 US customer remediation provision relating to CRS (100) - - 100 - Bank levy: - (907) - - 907 (458) (1,424) (123) 335 1,301 5
I. Group and RBWM Results 1Q14 results Business profit contributions Global Businesses Reported Profit Contribution (USDbn) 8.4 1.2 6.8 0.2 Retail Banking Wealth Management Retail Banking and Wealth Management Profit Contribution % better/(worse) PBT (USDbn) 1Q13 1Q14 1Q14 vs 1Q13 RBWM - Reported basis 1.6 1.7 9 1 RBWM - Underlying basis 1.6 1.7 4 Of Which US run-off portfolio (0.2) (0.1) 75 3.6 2.9 Commercial Banking Principal RBWM Business 2 1.8 1.8 (5) Principal RBWM Business Underlying Profit by Region (USDbn) Global Banking and Markets 1.8 1.8 Europe 2.2 2.4 Global Private Banking Asia MENA 1.6 1.7 Other North America (0.1) (0.4) Latin America 1Q13 1Q14 1Q13 1Q14 All figures are sourced from 1Q14 IMS & 1Q14 data pack 1. Underlying basis eliminates effects of foreign currency translation differences, acquisitions, disposals and changes in ownership levels of subsidiaries, associates, joint ventures and businesses, and fair value ( FV ) due to movements in credit spread on own long-term debt issued by Group and designated at fair value 2. Excludes US run-off portfolio 6
I. Group and RBWM Results 1Q14 results RBWM highlights Financial highlights: RBWM: Underlying profit before tax ( PBT ) increased by 4% to USD1.7bn Principal RBWM business: Underlying profit before tax ( PBT ) decreased by 5% to USD1.8bn, of which: Revenue broadly in line with previous year reflecting the run-off of our Canadian consumer finance business and lower fees in the US and Europe. This was partly offset by non-recurrence of the loss on disposal of HFC Bank UK and higher revenue from savings and deposits, mainly in Europe and Asia Operating expenses increased by 2% mainly in Latin America and Asia. This was partly offset by lower customer redress provisions in the UK LICs were in line with prior year Strategy highlights Focused on: Three growth priorities Focus on relationship led personal lending to drive balance sheet growth Continue to develop Wealth Management with focus on growing customer assets Develop digital capabilities to support customers and reduce cost Implementation of Global Standards Streamlining processes and procedures Note: All figures are sourced from 1Q14 IMS & 1Q14 data pack 7
I. Group and RBWM Results Principal RBWM business profit before tax Underlying profit before tax (USDbn) 0.3 (0.1) (0.1) - (0.2) - Mainly in Latin America and Asia reflecting inflationary pressures and increased HTS, risk and compliance costs Run-off of our Canadian consumer finance business Lower fees in the US from mortgages, and in Europe from overdrafts and investment Increased revenue from savings and deposits, mainly in Europe and Asia 1.8 Includes: Q1 2013 Q1 2014 UK customer redress programmes USD164m USD83m HFC Bank UK secured lending portfolio sale USD138m - 1.8 1Q13 Principal RBWM Business 1Q13 Significant items 1Q14 Significant items 1 2 Revenue LICs Cost Associates 1Q14 Principal RBWM Business All figures are sourced from 1Q14 IMS & 1Q14 data pack 1. Revenue is net operating income before loan impairment charges and other credit risk provisions 2. Loan impairment charges and other credit risk provisions 8
I. Group and RBWM Results Principal RBWM business revenue Addressing conduct risk and improving the quality of revenues Reported Revenue 1 (USDbn) 6.3 6.2 6.1 6.4 6.0 Europe Asia MENA North America Latin America 1Q13 2Q13 3Q13 4Q13 1Q14 1Q14 vs 1Q13 Principal RBWM Revenue (USDm) Global Business Revenue2 HFCA better/(worse) (117) (2)% All figures are sourced from 1Q14 IMS & 1Q14 data pack 1. Revenue is defined as net operating income before loan impairment charges and other credit risk provisions 2. Global Business Revenue excludes underlying adjustments and significant items 3. Chart illustration based on dollar variance 2, 3 Underlying Adjustments & Significant Items Regional Performance Highlights Europe Regulatory changes impacting overdraft fees in the UK and card and overdraft rates in Turkey Lower wealth fees, loan and mortgage spreads and card balances in the UK partly offset by higher revenue from savings and deposits in Europe Asia Average balance sheet growth in assets and deposits mainly in HK Growth in deposit spreads and volumes in China and Singapore North America Continued run-off of the Canadian consumer finance business (HFCA) Lower mortgage fees and deposit balances in the US Latin America Lower wealth sales and current account fees in Mexico and Brazil Lower margins in Brazil from a shift to secured lending 9
I. Group and RBWM Results Industry context HSBC s industry leading actions Conduct Risk Agenda now informing the way we run the business Implemented new Global Wealth Incentive Framework removing formulaic link between products sold and RMs remuneration, instead focusing on total relationship with the customer Rolling out new Retail Banking Incentive Framework and removing formulaic link between sales of retail products and remuneration in 2014 De-risking the business and improving the quality of revenue 10
II. Growth Priorities Wealth Management Continue to develop Wealth Management with focus on growing customer relationships Our approach Wealth target Globally consistent, needs based, customer-centric Progress made Invested in training our front line staff to drive productivity Accelerated the delivery of platforms and digital capability Improved financial planning process and controls Introduced Net New Money as KPI for Premier RM 1 Increased quality of Premier client base 0.9 2010 2013 2016e Opportunity for growth Deepening Premier customer relationships through: Holistic relationship model Broader coverage and fulfilment of client needs Strengthening Premier brand and digital investment to deliver international capabilities Continued Focus Improve Premier RM productivity Increase client contact and coverage rates Revamp and re-launch Premier proposition Improve product relevance and service delivery (FX, Research) Grow Premier customers Total Relationship Balances 2 and Wealth Balances 1. Relationship Managers 2. Total Relationship Balances corresponds to Investment and Insurance Balances plus Premier Deposits 11
II. Growth Priorities Relationship-led lending Using personal lending to deepen relationships with existing customers and to generate new relationships Compete in proposition and mass market asset businesses UK, Hong Kong Maintain returns and target opportunities Australia, Taiwan, France, Canada, Singapore, US, China, Malaysia, Vietnam Focus on proposition and secured lending Brazil, Mexico, Turkey, India, Egypt, Argentina, Indonesia, UAE Process standardisation and simplification 1. On a constant currency basis 2. Other loan balances include non-residential loans and overdrafts balances Propositions Premier Advance Mass Market (returns based) Premier Advance Mass Market (relationship based) Premier Advance Mass Market (relationship based) Enhanced risk infrastructure Participation strategy Leverage marketing, proposition led, more unsecured within risk appetite Leverage marketing and pricing capability Managed growth, rebalancing portfolios towards secured lending Targeted originations Supported by Global analytics capability (USDbn) 15 0 (USDbn) 100 0 (USDbn) 10 0 Progress to date Average Other Loan Balances2 4Q13 4Q13 4Q13 ~2% ~4% ~10% 1Q14 Average Mortgage Balances 1Q14 Average Mortgage Balances 1Q14 1 New digital investments 12
II. Growth Priorities Digital Distribution evolution Mobile Investment examples Global mobile banking app Live in 25 markets at the end of March 2014, with 3.6 million downloads reached at the end of April 2014 Mobile payments Progressive deployment of simple and secure contactless payments Advanced capabilities Mobile stock and FX Trading Tablet Customer-facing Mobile features optimised for tablet devices Staff-facing Tablet-based tools for front-line staff to support discussions with customers, including: Mortgage Applications Wealth Engagement esignature Supported by Improved analytics through our Digital Centres of Excellence and dedicated Digital teams in markets DRAFT 13
III. Streamline RBWM transformation Improving efficiency and customer experience Approach Identify inconsistent processes / Define customer journey and benchmark performance Streamlining - tangible benefits Sales channels and propositions: Branch network / contact centre optimisation Digital channel development Product range review Processes and servicing: Design Target Business and Operating Model / select standardised approach Customer journey based process re-engineering Migrating service processes to optimal channel Locating work in the right locations Improving input quality, decreasing turn around times Infrastructure: Build once and deploy across the network prioritised by opportunity Support functions and processes reengineering Cost rationalisation Redeploy staff capacity to improve customer servicing DRAFT 14
IV. Summary Global RBWM Priorities 2014: Continue implementation of clear strategy Securing customers future prosperity and realising their ambitions Growth priorities in 2014 Relationship led personal lending Continue to develop Wealth Management Digital capabilities 2016 targets Financial Nonfinancial RoRWA 1, % RoRWA 1, excl. run-off, % Incremental wealth revenues 2 3.8-4.3 5.0-5.5 USD3bn Customer Recommendation Index (CRI) for affluent segment in priority markets 3 Total customer relationship balances Digitally active customers 1. CRD IV end point basis 2. Incremental revenues 2010 to 2016 3. CRI measured in Argentina, Brazil, Canada, France, Hong Kong, India, Mainland China, Malaysia, Mexico, Singapore, Taiwan, Turkey, UAE, UK and US DRAFT 15
V. Appendix US run-off portfolio 1 Progress in running down and de-risking US legacy portfolio (USDbn) 0.5 0.0-0.5 3 2 Revenue LICs Operating Expenses Loss before tax 1Q13 1Q14 Revenue reduction driven by lower NII from the sale of the non-real estate portfolio in 2013 and lower average balances Lower LICs reflects a reduction in CML lending balances following continued run-off and disposals, lower levels of new impaired loans and improvements in the US housing conditions Operating expenses decreased mainly due to the non-recurrence of a customer remediation provision related to the former Cards and Retail Services (CRS) business allocated to the US run-off portfolio All figures are sourced from 1Q14 IMS & 1Q14 data pack 1. On a reported basis 2. Revenue is net operating income before loan impairment charges and other credit risk provisions 3. Loan impairment charges and other credit risk provisions 16
V. Appendix US run-off portfolio 1 Progress in running down and de-risking US legacy portfolio (USDbn) 110 RWA -27%5% 0 1Q13 1Q14 50 Loans and Advances to customers (gross) -24%5% 0 1Q13 1Q14 Note: 1. On a reported basis 17